8. (1) No fine, penalty or rate of interest shall be stipulated for, taken, reserved or exacted on any arrears of principal or interest secured by mortgage on real property or hypothec on immovables that has the effect of increasing the charge on the arrears beyond the rate of interest payable on principal money not in arrears.[45]

Origins and Scope of Section 8

[66] In general, section 8 will prevent the lender from increasing the rate of interest on a mortgage on default. However, the section is expressed in terms of its original 1880 language and also precludes the imposition of a fine or penalty exacted on any arrears. Parliament in 1880 was responding to abusive lending practices whereby default terms were often undisclosed and therefore unknown to the borrower at the time of the loan agreement. A borrower might not understand that default and the accumulation of arrears triggered a higher rate of interest.[46] Rather than mandate any form of cost of credit disclosure, Parliament prohibited the lender from imposing higher rates of interest after default.[47]

Judicial Interpretation of Section 8

[67] Although there is extensive case law on section 8, the British Columbia Court of Appeal, in Reliant Capital Ltd. v. Silverdale Development Corp., concluded that “the only thing on which the courts seem to agree is the difficulty of construing the language of section 8 in the context of the modern commercial world.”[48] There are numerous examples in the case law where increased interest rates, charges or the payment of a bonus have been held to contravene section 8.[49]

[68] There is also recognition in the case law that the parties should have some freedom to structure their transactions and not every challenge under section 8 has been successful. Some courts have emphasized that the starting point is freedom of contract under section 2 and that section 8 is an exception to that general principle.[50] This has led to an alternative line of cases in which the courts have concluded that section 8 has not been violated, perhaps in response to the “inventive drafting” of the solicitors seeking to avoid the application of the earlier case law.[51]

[69] Yet there appears to be no consistent form of reasoning in how the courts analyze section 8, leading Professor Waldron to conclude:

Other cases under the Interest Act have applied equally artificial means of accommodating modern commercial needs to this archaic statute. That is unfortunate. The need to adopt such technical and meaningless distinctions does not advance the purposes of commercial law.[52]

Continued Utility of Section 8?

[70] It must be asked whether there is any continued role for section 8 to play as it is currently worded. Section 8 pre-dates the significant development of consumer lending and thus does not distinguish between commercial mortgages and residential mortgages.[53] Commercial mortgage transactions entail risk taking by both parties. And as Professor Waldron notes, the modern lending world is a very different one from the nineteenth century:

Stability of interest rates can no longer be counted upon in our modern world. Moreover, interest rate is no more consciously tied to risk in the lending environment. The risk of the loan that is in default may be very different indeed from the risk assumed at the beginning of the transaction. Prudent lenders, not simply rapacious lenders, might wish to provide for this eventuality. Section 8 of the Interest Act has posed a significant barrier to doing so.[54]

[71] If the commercial lender has adequately disclosed to a commercial borrower the increased rate of interest that would apply on default and there is no allegation of inequality of bargaining power at the time of the transaction why shouldthe federal Interest Act stand in the way of that consensual transaction?

[72] Therefore, the working group is of the view that section 8 should be restricted in scope and should apply to mortgages that charge real property primarily used by the borrower as a principal residence. While most commercial transactions would be excluded from section 8, we propose that the section would cover a collateral mortgage given by a small business person against his or her home.

[73] The working group recognizes that the origins of section 8 clearly pre-date the development of contract law jurisprudence dealing with default provisions. Similarly section 8 also pre-dates the development of common law unconscionability doctrines as well as unconscionability legislation.[55] Although a reformulated section 8 would overlap to some extent with this provincial unconscionability law, the working group concluded that a new section 8 would supplement such provincial law. Retention of a reformulated section 8 will be a better solution than outright repeal.

[74] As with other provisions commented on in this report, consultation with practitioners and stakeholders on section 8 would be desirable.